Investors Appear Satisfied With Richinfo Technology Co., Ltd.'s (SZSE:300634) Prospects As Shares Rocket 28%

Despite an already strong run, Richinfo Technology Co., Ltd. (SZSE:300634) shares have been powering on, with a gain of 28% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

After such a large jump in price, Richinfo Technology may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 52.4x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times haven't been advantageous for Richinfo Technology as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Richinfo Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Richinfo Technology.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Richinfo Technology's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 43%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 29% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 69% over the next year. Meanwhile, the rest of the market is forecast to only expand by 40%, which is noticeably less attractive.

With this information, we can see why Richinfo Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Richinfo Technology's P/E

Richinfo Technology's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Richinfo Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Richinfo Technology that you need to be mindful of.

Of course, you might also be able to find a better stock than Richinfo Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.